By Scott Bauer
At a Glance
- Higher demand and seasonal gasoline blends traditionally send prices higher in summer
- Estimates suggest prices in summer 2019 could drop by 3 percent vs. a year ago
Now that Memorial Day is behind us, the summer driving season is officially here. It is widely believed that gas prices rise in the summertime because more people travel, and the big oil companies want to take advantage of the increased demand. This isn’t necessarily true, and we may see the opposite this season.
Summer Gasoline Grade
While increased demand does have some effect on prices, many other factors determine the price of gasoline. The market focuses on crude oil prices and supply, which account for over 50 percent of the cost of gasoline, but the switch from winter grade fuel to summer grade fuel plays a huge part in increased prices as well.
The fuel supply changes twice a year and is known as the seasonal gasoline transition. Summer blend fuel uses different additives which, according to the Environmental Protection Agency, reduce pollution and smog during the summer ozone season which occurs from June 1 to September 15. It burns cleaner than winter-grade fuel.
These additives are not the sole reason for the increased cost of gas at the pump. Refineries must briefly shut down before they begin processing the new fuel and converting to summer blends. This typically happens in March and April so that gas stations can have the summer-blend fuel in tanks by June 1. In fact, the average monthly price of U.S. retail-grade gasoline in August was about 36 cents per gallon higher than the average price in January, according to the Energy Information Administration.
Following the summer driving season, companies switch back to winter blends starting in September.
Other factors determine the cost of gasoline as well, none perhaps as important as geopolitical tensions which can cause the disruption of production. Refiners have had a difficult time getting gasoline supply back to the lower end of the average range in 2019 as they have had to deal with major OPEC production cuts (which have been in place since December 2018). In addition, the loss of supply from Venezuela due to sanctions has severely impacted the heavier crude oil market. Heavier crude is most efficiently used in jet fuel and has tightened the market considerably. Recent tension and sanctions on Iran have also tightened the market and added to the risk premium for oil.
But, as mentioned earlier, U.S. consumers may pay less at the pump this season. The U.S. Energy Information Administration, expects the retail price of U.S. regular-grade gasoline to average $2.76 per gallon this summer, down 3 percent from the 2018 summer average of $2.85 per gallon.
12.2 Million Barrels
While uncertainty persists among the OPEC+ group of producers whether they will maintain and potentially extend their current production cuts, concerns about slowing global demand and the ongoing trade war between the U.S. and China have kept oil prices in check.
Astonishingly, U.S. refiners have increased production to 12.2 million barrels a day. Just last year, the 10-million mark was considered the upper end of the production range. In late May, figures showed a 16.8-million-barrel weekly increase in U.S. crude oil and product stock, its highest total since October 2017. This may have been the catalyst behind crude’s recent 6 percent drop and ultimately allows consumers to get gasoline at a discount this summer.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.